Tax Breaks Boost Rural Rehabs: New Bill Offers Up to 40% Credit, Starting 2026

The "Rural Historic Tax Credit Improvement Act" aims to pump new life into rural communities by supercharging tax credits for building rehabilitation. This isn't just about fixing up old buildings; it's a targeted effort to spur economic growth and create more affordable housing where it's needed most.

Rehab Revolution: What's Changing?

This bill significantly increases the rehabilitation tax credit for projects in designated rural areas. Here’s the breakdown:

• Affordable Housing Projects: Get a hefty 40% credit on qualified rehabilitation expenses (capped at $5 million in expenses).
• Other Projects: Still a solid 30% credit on qualified expenses (also capped at $5 million).

To qualify as "affordable housing," at least half the building's square footage must be residential, and half of that must be new or maintained as affordable housing. Alternatively, at least a third of the entire building's square footage can be new or maintained affordable housing. "Affordable" means housing for households earning no more than 80% of the area's median income, as defined by HUD (Section 2).

For example, imagine a developer renovating an old factory in a small town. If they convert it into apartments, and at least half of those units are affordable for families making 80% or less of the local median income, they could get a 40% tax credit on up to $5 million of their rehab costs. That's a significant incentive.

Rural Focus: Who Benefits?

The bill defines "rural area" as anywhere outside a city or town with more than 50,000 residents and its immediate urbanized surroundings (Section 2). This means the tax credits are specifically targeted at smaller communities, not sprawling suburbs.

This could be a game-changer for towns struggling with aging infrastructure and a lack of affordable housing. Think of a rural community with a historic main street. This bill could make it financially viable to restore those buildings, attracting businesses, residents, and jobs.

Credit Transfers: Making Deals Happen

One of the most interesting parts of this bill is that it allows developers to transfer all or part of their tax credit to someone else (Section 2). This means a developer who might not have a huge tax liability themselves can still benefit from the credit by selling it to, say, a larger company that does. This could make it easier to finance projects in rural areas where traditional funding might be harder to secure.

There are rules, of course. Both the developer and the buyer have to report the transfer to the IRS, and there's paperwork involved (Section 2). But this flexibility could be a major boost for getting projects off the ground.

Keeping it Affordable: The Recapture Rule

To make sure developers stick to the affordable housing commitment, the bill includes a "recapture" rule (Section 2). If a project stops meeting the affordability requirements within a certain period, the developer has to pay back the tax credit they received. There's a 45-day grace period to fix any violations after being notified by the Secretary, but this rule is designed to ensure long-term affordability.

Simpler Taxes: No More Basis Adjustment

Finally, the bill simplifies the tax calculations by eliminating the "basis adjustment" for the rehabilitation credit for these rural projects (Section 3). This is a bit of tax jargon, but basically, it means developers won't have to reduce the depreciable value of the building by the amount of the credit they receive. This makes the tax benefit more straightforward and potentially more valuable.

The Bottom Line

This bill is all about incentivizing investment in rural areas, with a particular focus on affordable housing. It offers significant tax breaks, flexibility in financing, and rules to ensure long-term affordability. If it works as intended, it could be a major win for smaller communities across the country, and it all kicks in for properties placed in service after December 31, 2025.